IB Modes of International Bussns Exp

8/4/2019 IB Modes of International Bussns Exp

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INTERNATIONAL BUSINESSModes Of International Business Expansion

PRESENTATION BY:-

Vanshaj Kumar 027



LEARNING OBJECTIVES:

To explain the concept of expansion modes for InternationalBusiness

To examine strategic trade-offs in selecting expansion modes

To discuss trade-related expansion modes

To evaluate contractual expansion modes

To elucidate investment modes of expansion

To explicate strategy for selecting the expansion modes

To elaborate the decision-making process for selecting the

expansion modes



Introduction

• Why firms engage in international business?

– To expand their sales

– To obtain resources

– To diversify their sources of sales and supplies

–

To minimize competitive risk



International Business: Operations andInfluences



For expanding business in foreign countries:

• A firm has to choose an appropriate expansion

mode.Expansion modes are specific forms of

entering a foreign country:

•

To have international presence• Achieve the firm’s strategic goals

A thorough conceptual understanding of various expansion mode alternatives is

imperative for making inernationalization

decisions.



While evaluating trade-offs a firm has to

assess its ability and willingness to commit:

• Resources

• Risk perception

• Anticipated returns

• Desired extent of control & internalisation

• Flexibility



• Right selection of modes of expansion has

significant operational and strategicimplications on firm’s success in

internalization.

• Marketing strategy and country segments also

need to be contemplated while working out

an expansion mode strategy.



Five Stages of internationalization

• Domestic operation and marketing activities

• Infrequent exports

• Exports through independent representatives

or agents

• Establishment of sales subsidiaries

• Foreign production and manufacturing



9

The Usual Pattern of Internationalization



Strategic Trade-offs in selecting

International Business Expansion Modes:



A FIRM HAS TO CHOOSE FROM A VARIETY OF

EXPANSION MODES DEPENDING UPON:

• Ability and willingness to commit resources in the

target country

• Magnitude of risk the firm is willing to take in its

international expansion• Types of return anticipated from overseas operations

• Extent of control to be exerted in the firm’s foreign

operations

• Level of externalization of the firm’s

resources including its intellectual prop.

• Desired flexibility of expansion modes



International Business expansion modes

•

Modes of international business expansion isan institutional mechanism by which a firm

expands to its operation overseas. Modes are :

1. Trade related modes

2. Contractual modes

3. Investment modes



TRADE-RELATED MODES:



• EXPORTS: may be defined as manufacturing the

goods in home country and shipping them for sales

to other country.• INDIRECT EXPORTS: when a firm sells its products

through an export intermediary based in its home

country & does not take care of export activity.

A firm may expand internationally through indirect

exports using either of the following ways:

• Selling to a foreign firm or a buying agent an the home

country

• Exports through a merchant intermediary such as export

house, trading house etc .



• Agents: agents do not take the title of the

goods and operate on behalf of principal

firms, rather than themselves on commission

basis.

Major types of export agents include:

• Importer’s buying agents

• Country controlled buying agents

•

Buying Offices: Overseas firms make theirpermanent presence in the suppliers countries

by way of establishing a permanent buying

office.



• Merchant Intermediaries: Exports intermediaries that buy

and sell goods for a profit & take title of goods & assume risks

thereof.

• Merchant Exporter: collect produce from several

manufacturers or producers & export directly in their own

name.

• International trading Companies: are generally large

companies that accumulate, transport, and distribute goods invarious markets.

• Trading/Export houses: home country based firms involved in

international trading activities.

The State Trading corporation (STC) and Metals and Mineralstrading Corporation (MMTC) are the India’s largest trading

houses.





• Direct Exports: when a company makes its

domestically produced products available in foreign

markets without employing any market intermediaryin the home country.

• Merchant Importers: is an overseas based trader

who imports products and further sells them to

wholesaler or retailer for profit.

• Distributors: the distributors in the target countries

to purchase the goods and subsequently sell them

either to a market intermediary or to ultimatecustomer.



PIGGYBACKING- complementary exports

• A firm may expand its business in a foreign

country by using the distribution network of

another company .

• Under the piggybacking arrangement, the

exporting firm is termed rider whereas the

other firm with established distribution

channel in the target country is carrier.

• In , piggybacking exports, the

branding and market promotion

arrangements may differ.



COUNTERTRADE

• Countertrade is a generic term that refers to various

forms of trade arrangements wherein the payment isin form of reciprocal commitments for other goods

or services rather than an exclusive cash transaction.

Countertrade mainly takes place because:• Scarcity of hard currency with importing country

• Restrictive importing country’s foreign exchange

regulations to conserve hard currency

• Balance of trade problems of importing countries

• Trade opportunity with restrictive market.





E-modes of business expansion

• Use of information and communication

technology has rapidly grown over the recent

years of expanding business internationally.

• Hamaracd.com ,an Indian website offers more

than 25,000 of the most popular as well as

popular songs of saregama’s

collection.



Contractual modes

• Contractual modes are often employed to make use of

strategic strengths & resources of a foreign based partner

company for international business expansion



Factors influencing choice of foreign

partners for contractual alliances include:

• Strategic strength of partner that can be

translated into some business value

• Commitment to cooperative goals

• Mutual trustworthiness

• Experience of operating in multi-channel

environment.



• International strategic alliance : when a firm

agrees to cooperate with one or more than

one firm overseas, to carry out a businessactivity wherein each one contributes its

different capabilities and strengths to the

alliance .

• Rapid growth in global strategic alliance

among large and small firms around the world

highlights of the significance of global

strategic alliances.

’



PHILIP’S GLOBAL STRATEGIC ALLIANCE

INDUSTRY PARTICIPATING COMPANIES COUNTRY OF

INCORPORATION

Advanced telephone sys AT&T US

Compact disks Sony Japan

Electronic credit cards Compagnie des machine bull France

Lighting & electroniccomponents MatsushitaElectronic devices JapanHong Kong

Minicomputer software ICL PLC Britain

Mobile Communications Thomson / Siemens France / west Germany

Personal Memory systems Control data US

Semiconductors & microchips Intel US

Video recorders Grundig West Germany

Videotex software & systems Enidata Italy



Advantages of international strategic alliance

• The investment cost is shared

• The internationalizing firm gets access to

tangible & intangible resources of the alliance

partner

• There is reduction in individual risks while

operating overseas

• The alliance partners often cooperate so as to

make use of their specific individual strengths

• Strategic alliances often promotes co-

operation among competitors for mutual

benefit.





• INTERNATIONAL SUB-CONTRACTING

arrangements may involve supply of inputs,

such as raw materials, semi-finished goods,components and technical know-how to a

local manufacturer in a foreign country.

• Contract manufacturing has also been used as

a strategic tool for economic development in

number of countries ,such as Korea, Mexico,Thailand, China, etc.



Turnkey projects

• Conceptually ‘turnkey’ means handling over a

project to the client , when its complete in all

respect and is ‘ready to use’ on ‘turning the

key’ .

• International turnkey projects include

conceptualizing, designing, constructing,

installing, & carrying out preliminary testing of

facilities.



The major types of turnkey project include:

• Build and transfer (BT) : the firm conceptualizes,

designs, builds, carries out primary testing, and

transfers the project to the owner.

• Build ,operate , and transfer (BOT): the

internationalizing firm not only builds the projectbut also manages it for a contracted period before

transferring it to the foreign owner.

• build, operate, own (BOO): the internationalizing

firm is expected to buy the project once it has been

built , which results in foreign direct investment after

a certain time period.



INTERNATIONAL LEASING• A firm may expand its business by leasing out new and

used equipment to a manufacturing firm in such

countries.

• The ownership of the property retains with the leasing

firm (i.e, lessor) throughout the lease period during

which the foreign- based user (i.e., lessee) pays leasingfee.

• International Lease finance corporation (ILFC),

headquartered in Los Angles, is the largest aircraft

lessor by value that had an inventory of about 1000

aircrafts by 2008.



INTERNATIONAL LICENSING

A firm, makes its intangible assets, such as

patents, trademarks and copyrights, technicalknow-how and skills available for foreign

company for a fee termed as royalty.

• Licensing termed as powerful tool forinternational expansion with little financial

commitment.

Ex:- ARROW from America since 1851,followslicensing strategy to expand business.



Licensing

• The property licensed

may include:

– Patents

–

Trademarks – Copyrights

– Technology

– Technical know-how

– Specific business skills



Process and Trade-mark licensing

•Process Licensing: the license gets the right tomanufacture, produce and market the product

in the defined market area.

• Trade-mark Licensing: the licensee also gets

the rights to use trade –marks/trade-names,

besides using the process know-how.For instance, the brand Pierre Cardin was

considerable affected adversely consequent to

its licensing about 800 brands.



CROSS - LICENSING

• It is a form of licensing involving mutual

exchange of intangible assets that may not

involve a cash payment .

• Cross – licensing is a mutual sharing of patents

between two companies

without exchange of

licensing fee.



International Franchising

• Franchising is a special form of licensing in

which an internationalizing firm (franchisor)

provides intangible assets , such as

trademarks, process know-how etc., and

methods of doing business in a prescribedmanner in return of franchising fee.

• Franchising is a low-

risk low-cost business

expansion mode.



Key Reasons for Franchising

Financial Gain

Market Potential

Saturated DomesticMarkets



International franchising is beneficial as it:

• Facilitates rapid country entry with low entry

risk

• Requires low investment and overheads

• Avoids day-to-day hassles of business

operations

• Makes use of local entrepreneurs as

business partners and their skills



Limitations of cross-franchising

• Restrictive host country regulations

• Problems in identifying and selecting right

franchisees

•

Franchisor gets ‘franchising fee’ rather thansharing the profits

• Lack of direct control

•

It adversely affects the brand equity if quality is lowered.

• Franchisor does not gain market

Market knowledge.



INVESTMENT MODES



A firm shifts its manufacturing operations

in foreign countries

• To effectively respond to market competition.

• To take advantage of host country incentive

• To gain access to the host country resources to

be used as inputs

• To shift manufacturing operation overseas

•

To have manufacturing basein market proximity

• To minimize logistics cost



Overseas assembly or mixing

• In international assembly a manufacturer

exports components, parts or machinery in

completely knocked down condition and

assembles these parts at a site of foreign

country.• In the food and pharmaceuticals industry , the

equivalent industry known as mixing where in

the imported ingredients are used at thefirm’s overseas facilities.

JOINT VENTURES



JOINT VENTURES• International Joint ventures offer equity

investment opportunities in foreign countrieswith sharing resources & risks with partner

firms

• The partner firms may be either one or more

local companies in the target country or firms

either from third country or home country.

Based on equity stake JV may be of 3 types:

• Majority (< 50% ownership)

• 50-50 % (equal ownership)

• Minority (> 50% ownership)



Major benefits of international JV

• They provide access to countries where

complete ownership is restricted.

• Access to complementary strengths of the

partner firm besides capital

• They require less investment compared to

complete ownership

• Higher returns compared to trade related &

contractual modes of expansion

• Greater degree of control

• Reduce operating and political risks



Limitations of JOINT VENTURE

• Shared control over overseas operations

• Risk of equity partner becoming a future

competitor

•

Management problems due to culturaldifferences

• Difference in goals

•

Trade-secrets are often shared• Lack of flexibility



CASE STUDY

• Japanese consumer electronics company SONY corp.

and Swedish telecom firm Ericsson merged to

establish a 50-50 joint venture headquartered in

London in 2001 so as to combine Ericsson’s

technological leadership in telecommunication &

Sony’s global marketing strengths to make mobile

phones . Both companies have stopped making their

own mobile phones in 1995. Sony also introduced

Walkman branded music phones. In first quarter of 2006 Sony was the 4th largest manufacturer of

mobile phones in world.



WHOLLY OWNED SUBSIDIARIES

• A firm expands internationally to have

complete control over its overseas operations

by the way of 100% ownership in the new

entity.

• Wholly owned subsidiaries help

internationalizing firm protect its technology

and skills from external sharing.

M j b fit f h ll d



Major benefits of wholly owned

subsidiaries

• The firm exerts complete control over its

foreign operations

• The trade secrets, proprietary technology andother firm specific advantages (FSAs) retains

within the company



Limitations of wholly owned subsidiaries:

• They require commitment of large financial

and other operational resources

• There are high investment, if also associated

with high risk exposure

• Considerable international experience &

exposure is required



Greenfield Operations

•

Creating production and marketing facilitieson a firm’s own from scratch is termed as

green-field operations.

Mergers and acquisition



Mergers and acquisition

• Transfer of existing assets of a domestic firm

to a foreign firm lead to mergers andacquisitions.

• Cross-border acquisitions involves transferring

management control of assets and operationof a domestic company to foreign firm.



Acquisitions can be of following types:

• Minority : when a foreign firm acquires 10%

to 49% interest in a firm’s voting stock

• Majority: when a foreign firm acquires 50% to

99% voting interest

• Full outright stake: when a foreign firm

acquires 100% of voting stock

STRATEGY FOR SELECTING INTERNATIONAL



STRATEGY FOR SELECTING INTERNATIONAL

BUSINESS EXPANSION MODE

Basic rules for selecting business expansion modes:• Naïve rule: the management uses same expansion

mode for all foreign markets ignoring the heterogeneity

of different foreign markets & expansion conditions.

• Pragmatic rule: it looks for a workable entry mode,

only if initial entry mode is not feasible.

• Strategy rule: helps maximize the profit contribution

over the strategic planning period subject to availability

of resources, risks, and non-profit objectives.



Marketing Strategy and expansion modes

Sequential adoption of business expansion modes



Sequential adoption of business expansion modes

BASED ON MARKET ASIA PACIFIC DIVIDED INTO



BASED ON MARKET ASIA-PACIFIC DIVIDED INTO

5 SEGMENTS

• Platform countries: the firm can use these countries

as initial bases to gather intelligence & initiate first

contacts.

• Emerging countries: firms build up their initial

presence in countries by way of a representativeoffice.

• Growth countries: companies often build a

significant presence in these countries

• Maturing countries: the prime task here is to look

for further market developments

• Established countries: growth prospects are much

higher in these countries

Decision tree for selection of international business modes



Contd…





‘A self explanatory decision tree serves as a

useful tool for selecting an appropriate

international business expansion mode’



Thank you

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